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Consultation has become an essential and regular element of the way of life for UK corporate reporters over the last few years. Both the UK Government as policy maker through its Department of Business, Innovation and Skills and its regulator, the Financial Reporting Council, have found the need to consult regularly with the UK corporate reporting community on a number of issues over the last three years. Principal among these have been the Future of Narrative Reporting, Effective Company Stewardship and Revisions to the UK Corporate Governance Code. Indeed, there are ongoing consultations at present. In most cases it is possible to follow the rationale and outcome of those consultation processes, even if one may not always agree with their conclusions. It is also encouraging that the process does occasionally uncover flaws as it has done in the approach to Going Concern and Risk Assessment, and that the FRC has been prepared to recognise that it may not have got this right first time around. So, while one accepts that consultation in mandatory reporting is part of a democratic process, it is also reassuring to see that the process does on occasion contribute to a partial, if not always complete application of common sense.
With this shared experience of consultation the UK corporate reporting community might well have expected the consultation process for a voluntary reporting initiative – the introduction of the Integrated Reporting framework by the International Integrated Reporting Council – to be even more transparent and scrupulous. To its credit, the IIRC has been keen to demonstrate as well as it could the transparency of its consultation process. But, on the debit side, this transparency also exposes seeming intransigence and a lack of common sense that some may even perceive as arrogance.
On the credit side is the transparency of the consultation process. When publishing its final ‘International Integrated Reporting Framework’ on 9 December 2013, the IIRC also published its ‘Basis for Conclusions’ (“on the major technical issues raised by respondents to the Consultation Draft … “) and a ‘Summary of Significant Issues’ (a “high-level summary of the process followed by the IIRC and how significant technical issues raised by respondents [ … ] have been addressed“). It may require some effort to work through and review all three documents but the upshot is that one can follow the IIRC’s thinking and form a firm opinion on the material and on the approach adopted. This is when the debit side and the less positive aspects of the consultation become apparent. Having set out its stall in its original draft IR Framework back in December 2012, the IIRC appears to have been reluctant to revise its thinking in any significant manner and amend, other than cosmetically, the final IR Framework in deference to the many responses it received to its consultation draft.
A prime example of this reluctance centres around the “principles-based approach” that is core to the application of the IR Framework. In the words of the IIRC it reflects “the intent to strike a balance between flexibility and prescription …“. But one can only successfully apply a principles-based approach to corporate reporting if there is a solid foundation of understood management concepts and techniques upon which reporters can then adopt and apply a flexible approach. Otherwise, the consequent report outputs tend to be meaningless and are devoid of any comparability. The IR Framework has a ‘Fundamental Concepts’ section that sets out the IIRC’s own spin on management concepts and business theory – its own “theoretical underpinning for the concept of value creation” – that will be anathema to leaders and managers of most businesses in most jurisdictions, no matter how correct this concept is. The IIRC then adds to this confusion by giving its new management concept the term ‘business model’. Challenged on usurping the term ‘business model’ by many of the consultation respondents the ‘Summary of Significant Issues’ brushes aside these respondents’ concerns with the arrogant and almost defiant declaration that: “Although other definitions [of ‘business model’] exist, none seem to prevail“. This disregard for extant management technique and practice does not inspire confidence and will surely retard the rate of adoption of this voluntary reporting framework.
This is hardly the stuff of the solid foundation required for a successful principles-based approach and, above all, for the introduction of effective Integrated Reporting. Most, if not all of the 359 organisations that responded to the consultation are surely committed to the need for an integrated reporting initiative. Otherwise, why would they have expended the effort to engage in the process? Perhaps the IIRC is more preoccupied with the introduction of ‘Integrated thinking’ as the precursor to ‘Integrated Reporting’ and believes that it must obsess with the introduction of new concepts and theory and so has lost sight of the practical issues that will help its reporting Framework to gain traction among reporting companies? Certainly, few companies in the UK have yet been persuaded to develop an IIRC Integrated Report by what they have read and seen. Many are also daunted by this new reporting challenge and are dismayed by the shortage of guidance from the IIRC on how to develop an Integrated Report. Guidance is sparse and “As part of its future work plan, the IIRC will consider developing a database of authoritative indicators … “, but the IIRC makes no commitment to do so. After all its hard work in getting thus far, it would be a pity if the IIRC’s apparent single mindedness and lack of regard for effectively galvanising the reporting community into action were to prevent it from successfully pursuing its vision.